Mediaspace scheduled maintenance: Aug 25, 2026 07:00 - 12:00 AM. During this time, videos will be temporarily unavailable. Check status updates.

Lecture

Risk-neutral Valuation: Traded Securities

In course

FIN-404: Derivatives

This course provides a detailed presentation of the standard models for the valuation and hedging of derivatives products such as European options, American options, forward contracts, futures contract and exotic options. ...

Description

This lecture covers risk-neutral valuation in the context of traded securities, focusing on the evolution of ex-dividend prices, martingale representation, examples of Q-martingales, derivatives, hedging strategies, completeness of markets, and the second Fundamental Theorem of Asset Pricing. It also delves into bond pricing models, such as the Vasicek model, PDE formulation, pricing of cash flows, Gordon growth assumptions, coupon bonds, forward and futures contracts, and the construction of futures prices. The lecture concludes with a proof related to the risk-neutral pricing framework.

This video is available exclusively on Mediaspace for a restricted audience. Please log in to MediaSpace to access it if you have the necessary permissions.

Watch on Mediaspace

Instructor

Julien Hugonnier

Official source

Ontological neighbourhood

Business

Finance: Financial risk management

Economics

Microeconomics: Financial economics

Related concepts (32)

Real options valuation

Real options valuation, also often termed real options analysis, (ROV or ROA) applies option valuation techniques to capital budgeting decisions. A real option itself, is the right—but not the obligation—to undertake certain business initiatives, such as deferring, abandoning, expanding, staging, or contracting a capital investment project. For example, real options valuation could examine the opportunity to invest in the expansion of a firm's factory and the alternative option to sell the factory.

Rational pricing

Rational pricing is the assumption in financial economics that asset prices – and hence asset pricing models – will reflect the arbitrage-free price of the asset as any deviation from this price will be "arbitraged away". This assumption is useful in pricing fixed income securities, particularly bonds, and is fundamental to the pricing of derivative instruments. Arbitrage is the practice of taking advantage of a state of imbalance between two (or possibly more) markets. Where this mismatch can be exploited (i.

Fundamental theorem of asset pricing

The fundamental theorems of asset pricing (also: of arbitrage, of finance), in both financial economics and mathematical finance, provide necessary and sufficient conditions for a market to be arbitrage-free, and for a market to be complete. An arbitrage opportunity is a way of making money with no initial investment without any possibility of loss. Though arbitrage opportunities do exist briefly in real life, it has been said that any sensible market model must avoid this type of profit.

Futures contract

In finance, a futures contract (sometimes called futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset transacted is usually a commodity or financial instrument. The predetermined price of the contract is known as the forward price. The specified time in the future when delivery and payment occur is known as the delivery date.

Bond valuation

Bond valuation is the determination of the fair price of a bond. As with any security or capital investment, the theoretical fair value of a bond is the present value of the stream of cash flows it is expected to generate. Hence, the value of a bond is obtained by discounting the bond's expected cash flows to the present using an appropriate discount rate. In practice, this discount rate is often determined by reference to similar instruments, provided that such instruments exist.

Related lectures (33)

Equilibrium State Prices Determination

Explains the determination of equilibrium state prices in asset pricing through consumption market clearing and budget constraints.

Interest Rates and Contracts: Duration and Convexity

Explores duration and convexity in interest rate models for bond portfolio hedging.

Asset Pricing: Fundamental Theorems

Covers the fundamental theorems of asset pricing, including EMM, self-financing strategies, risk-neutral pricing, and completeness of markets.

Forward Measures: Interest Rate Models

Explores forward measures, option pricing, and bond option pricing in interest rate models.

Factor Models in Finance